I recently heard about a Supreme Court decision that may affect the sales taxes that I pay when I purchase items online. Will you explain?

In a recent decision, the United States Supreme Court issued an opinion in the much-anticipated Wayfair v. South Dakota sales tax case that will cause many internet purchases to be more expensive at check-out. This could ultimately mean that states will be allowed to collect sales tax from out-of-state retailers making sales to in-state residents, most notably online, generating billions of dollars in additional taxes.

The Court overturned the historic “economic presence nexus” standard (discussed below) that required sellers to collect state sales taxes only if they had a warehouse or office in the state. Prior to this most recent Supreme Court decision, online retailers that did not meet the physical presence test in a specific state were not required to directly collect sales tax when they sold goods or services to customers in that state. A 1992 decision in Quill v. North Dakota, established the physical presence test for sales and use tax nexus which was well before the surge of online sales. States have been trying since then to find constitutional ways to collect tax revenue from remote sellers into their state. The Wayfair case empowers states to establish a level playing field for the taxation of goods sold by in-state and out-of-state sellers.

What is economic nexus?
Economic presence nexus is a legal term that refers to the requirement for those conducting business in a state, including professional service firms, to collect and pay tax on income derived in that state even though the business may lack a physical presence there.

The Court effectively determined that South Dakota’s tax framework (i.e., 200 or more transactions per year or $100,000 in sales per year) was constitutionally permissible. In short, it was determined that where a state’s sales tax system has (a) reasonable nexus thresholds; (b) simplified procedures; and (c) no retroactivity in its application, it should pass constitutional muster.

What does all of this mean for taxpayers?
Online shoppers who reside in one of the 45 states that have a sales tax should have been reporting and remitting those levies to their state of residence. The reality is that the vast majority of people simply do not remit taxes on internet purchases. The new ruling will now eliminate the tax avoidance by people that purchase online and will require the retailer making the sale to collect and remit the sales tax at the time of purchase in most cases.

Wall Street took notice last week, and shares of mega-online retailers like Amazon, Overstock, and of course Wayfair, dropped in price significantly in the immediate wake of the decision. It could also ultimately mean a lot more cash flowing into state government coffers. The Government Accountability Office estimates that in 2017 alone, state and local governments could have collected up to $13 billion more had they been permitted to collect sales tax payments from online sellers.

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We will have to wait and see how specific states will interpret the Supreme Court decision as they establish thresholds for retailers required to collect and remit sales tax. Hopefully, the majority of states will follow South Dakota’s lead and exempt smaller merchants from having to report and collect sales taxes.

One thing is certain, the Wayfair decision creates a new level of uncertainty in the area of sales tax and future controversy in this area is likely. For more information about how this Supreme Court decision will affect you, contact a tax professional specializing in state tax matters.

Tom Cooney and Crystal Faulkner are partners with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. For additional information, call 513-768-6796 or visit us online at www.mcmcpa.com.